Global economy still vulnerable but UK improving, OECD warns

The outlook for the global economy has darkened as the prospects for emerging markets deteriorate and the United States approaches another potentially catastrophic debt deadline, according to the Organisation for Economic Co-operation and Development

The thinktank upgraded its outlook for the UK but cut its forecasts for the global economy. The Paris-based group forecast that unemployment would remain stubbornly high in several of its 34 mainly rich countries, that growth would slow in many emerging markets and that there was a significant threat to financial stability from the US Federal Reserve unwinding its stimulus programme – a process known as tapering.

Presenting its global outlook, Pier Carlo Padoan, the OECD's deputy secretary-general and chief economist said many parts of the global economy had been left vulnerable by a deep recession and exceptional stimulus packages.

"The global economy continues to expand at a moderate pace, with some acceleration of growth anticipated in 2014 and 2015. But global growth forecasts have been revised down significantly for this year and 2014, in large part due to weaker prospects in many emerging market economies. Downside risks dominate and policy must address them," he said.

For the UK, however, the Paris-based thinktank is more optimistic than many other forecasters and has revised up forecasts made in May. Predicting that stronger investment and household spending will drive faster growth, the OECD now forecasts the UK economy will grow by 2.4% in 2014. In May it had forecast 1.5%.

For the wider OECD group of countries, the thinktank forecasts 2014 growth of 2.3%, unchanged from May. For the United States it is pencilling in 2.9% and for the eurozone just 1%.

Global GDP growth is now forecast at 3.6%, revised down from 4% predicted back in May.

"Almost all of this reflects a further growth slowdown in the large emerging market economies, which is tempering the pace of the recovery in the OECD economies. At the same time, downside risks have also risen once more," the OECD's outlook says, citing fragilities in the eurozone banking sector as well as the threat of financial instability during Fed tapering.

Problems in emerging markets could ripple into other economies and hamper growth, particularly in Europe and Japan, the thinktank warns.

For the United States, the OECD is calling on the Federal Reserve to keep monetary policy accommodative for some time and to balance uncertainty about where demand and the jobs market are headed against the costs of postponing an exit from its quantitative easing scheme.

It also has some strong words for US politicians after October's 16-day government shutdown and the row over the debt ceiling, or the borrowing limit that Congress sets for itself.

"Brinkmanship over fiscal policy in the United States remains a key risk and uncertainty," said Padoan.

"The debt ceiling needs to be scrapped and replaced by a credible long-term budgetary consolidation plan with solid political support."

In the euro area, the OECD feels the recovery is "lagging and uneven" while unemployment – especially among the young – remains very high and inflationary pressures are very subdued. It also sees weakness in the banking system as a major drag on growth in the euro area.

A spokesman for the UK Treasury said: "The OECD have revised their forecast for UK GDP up by more than any other G7 country over the next two years. This provides more evidence that the UK's hard work is paying off and the country is on the path to prosperity. Today's report also highlights the risks that remain to the recovery and urges the UK to stick to the government's plan that is growing the economy, lowering the deficit and inflation, and creating jobs. This is the only sustainable way to raise living standards for hardworking families".